The deadline for providing eligible employees written notice of your Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)—for new plans or existing ones—is right around the corner for most 2021 plans. (We say “most” here because while QSEHRAs don’t technically have to start on January 1st, most do.) The notice requirement might seem like a small thing, but overlooking it could cost you $50 per employee, up to a total of $2,500 per year.
Here’s what you need to know.
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The Legal Requirements
According to IRS guidance, an employer who offers a QSEHRA must provide each eligible employee a written notice at least 90 days before the QSEHRA program starts. Employees who are not eligible at the beginning of the year must also receive the notice on or before the date they become eligible for the plan.
The written notice you send your employees must include:
1. The reimbursement amount for the year.
The reimbursement amount is the maximum dollar amount of reimbursements you will offer the employee for the year. This is also sometimes known as the “reimbursement allowance” or the “permitted benefit.”
The reimbursement amount may vary from employee to employee based on the age of covered individuals or the employee’s family size.
If that’s the case, you can either:
- Create custom notices for each employee that state the employee’s specific reimbursement amount, or
- You can use a general template that simply lists out all the reimbursement amounts according to employee age and family size.
When an employee becomes newly eligible during the plan year, the notice must include the date the QSEHRA is first provided to them. It also must include the prorated reimbursement amount for which the employee is eligible—or the information needed to calculate the prorated amount.
Not sure how to calculate the prorated reimbursement amount for your employee? It’s easy.
Let’s say your plan year starts on January 1 and you provide your single employees with an annual reimbursement amount of $4800. This means that the monthly reimbursement amount for a single employee is $400 per month ($4800/12 = $400).
Your employee George (who is single) joins your company and starts work on March 1; he is immediately eligible for QSEHRA and his prorated annual reimbursement amount is $4000. (Because George didn’t work in January and February, the reimbursement amount for those months—$800—is subtracted from the annual amount).
(If you’re trying to work out how much you can afford to offer your employees, use this QSEHRA Budget Calculator to help you plan. To understand precisely how to use the QSEHRA Budget Calculator, read this.)
OK—back to your QSEHRA notice (sorry for the tangent, folks!). You’ve got to make a choice: either create a custom notice for each newly eligible employee or create a general template that works for every newly eligible employee.
2. Statement of duty to inform Health Insurance Marketplace.
You must advise employees that if they apply to a Marketplace for advance payments on the premium tax credit (PTC) under the Affordable Care Act, they’re required to inform the Marketplace of the amount of the QSEHRA reimbursement amount.
The notice also should explain that the amount of the QSEHRA reimbursement amount may affect the employee’s eligibility for, and amount of, any PTC. And it should instruct the employee to hold on to the notice in case they later need it to calculate the PTC on their individual income tax return.
3. Minimum essential coverage requirement.
The notice must include a statement that, if the employee doesn’t have a health insurance plan that meets minimum essential coverage (MEC) requirements for any month, reimbursements made under the QSEHRA will be taxable. That means that the reimbursements will be included in the employee’s gross income and will be subject to payroll taxes and income taxes. The good news is: if the employee is covered by healthcare plans that meet MEC, reimbursements are free of these taxes.
According to IRS guidance, the notice should also state that an employee who doesn’t have MEC for any month could be liable for a penalty payment (this is known as an “individual shared responsibility penalty” or as the “individual mandate penalty”).
This is a little complicated, but we’ll get through it: in 2018, a law passed called the Tax Cuts and Jobs Act that eliminated those penalties; however, it’s still a requirement to include this messaging in the written QSEHRA notice. It’s also important to remember that certain states have their own individual mandates, so make sure you know the law in your state.
How should I send the QSEHRA notice?
You can provide the QSEHRA notice by mail or electronically (via email) as long as you satisfy IRS requirements. Among other things, that means:
- The system you use to send the notice must be “reasonably designed” to provide the information in a way that’s at least as understandable to the employee as a written paper document.
- The system must be designed to 1) alert the employee about the significance of the information in the notice, and 2) provide any instructions necessary to access the notice in a readily understandable way.
You also need to obtain the employee’s consent to receive the notice electronically. Check in with your employee and make sure that they are OK with you sending the notice via email.
QSEHRA Employee Notice Template
Not sure how to fill out the template?
In the second paragraph, fill out the required four spaces as shown below:
Your permitted benefit for YEAR is AMOUNT if you have self-only coverage or AMOUNT if any members of your family also have coverage. (These amounts are prorated by month if you are not eligible on the first day of the plan year.) Your permitted benefit applies to medical expenses incurred on or after DATE (the first day of the plan year, typically January 1) .
For employees hired after the beginning of the plan year, you can use the same written notice as above, simply replacing the last sentence of the second paragraph with:
Your permitted benefit applies to medical expenses incurred on or after DATE (this is the newly eligible employees initial eligibility date) .
Download and fill out this template to properly notify your employees about QSEHRA: